CLO triple As are cheap by many measures, says Morgan Stanley

In a recent research report, Morgan Stanley looks at the performance of CLO triple As by three different measures, and finds that in each case the market is demanding a premium which is high relative to comparable assets.

It says that the 150 basis point difference in price between CLO triple As and triple As of other securitisation such as credit card ABS is not justified. Although CLOs have a longer weighted average life than credit card triple As, CLOs are unique among securitisations in having features to divert cashflow to pay down senior notes. This means that if the performance of the collateral deteriorates, the weighted average life of the senior notes is reduced.

The CDO Market Insights report also compares CLO triple As to the 30-100% tranche of the LCDX index, which has a 100bp lower spread. The analysts note the technical differences between the two products, but conclude that their risk is comparable.

Finally, Morgan Stanley looks at the ratio between CLO triple A spreads and those on a typical loan portfolio, and compares that ratio with the one between senior corporate index tranches and the underlying high yield and investment grade indices. The report concludes that the default correlation implied by current CLO triple A spreads is significantly higher than that implied by other markets.